R.I. hires analyst to review 38 Studios bond payments

PROVIDENCE, R.I. — The Chafee administration has hired a Minnesota financial analyst to study the financial impact of a potential default on the 38 Studios bonds.

Paul Grimaldi Journal Staff Writer paulegrimaldi

PROVIDENCE, R.I. — The Chafee administration has hired a Minnesota financial analyst to study the financial impact of a potential default on the 38 Studios bonds.

The state has hired Steven J. Johnson, of SJ Advisors in Eden Prairie, for the work, which was compelled by the General Assembly.

Lawmakers included $50,000 in the current fiscal budget for “a robust” study of the potential financial and “reputational impacts” of defaulting on the loan guarantee the state’s economic development agency gave bondholders to underwrite 38 Studios, the videogame company headed by former Red Sox pitching great Curt Schilling.

Schilling’s company failed shortly after its move to Providence. The failure left in question whether the state is obligated to pay off those bonds. At the point the company filed for bankruptcy in June 2012, bondholders were owed $112.6 million. That includes the $75-million initial borrowing and $37.6 million in interest over 10 years.

Excluding the amounts covered by reserve funds, state taxpayers potentially owe $89.2 million on Schilling’s state-backed loan, including a $2.5-million taxpayer payment to the bondholders on May 1, 2014, and $12.5 million in each of the next seven years.

There was much debate in the state during the 2013 legislative session about the merits of paying those bills.

The Chafee administration maintains that its own analysis, led by Peter Marino — of the Office of Management and Budget, shows failing to pay the bonds would have serious financial consequences for the state, its municipalities and various entities that rely on financing from investors outside Rhode Island.

“Our position is clear,” said Richard Licht, director of the Department of Administration. “This is a priority of the governor, of the Office of Management and Budget and the Department of Administration to pay these obligations.”

Lawmakers grudgingly approved the initial $2.5-million payment to the investors who purchased the high-yield bonds, but they sought an “independent” analysis of potential effects of a decision to forego the remaining payments.

But the request for proposals from financial analysts put out by the state, failed to generate any interest and was dropped, itself a contentious development in the long-running turmoil created by the 38 Studios deal.

It did not, however, re-issue a formal request for proposals, he said, opting to use the failed one as a “template.” The state also increased the proposed payment — now capped at $75,000, plus expenses.

Still, Licht said, there were many people who declined the work.

Johnson, the Minnesotan chosen to do the analysis, will spend about a month reviewing the 38 Studios financial material before reporting back to Rhode Island officials, Licht said.

“We’re looking for a response by mid-April,” Licht said.

Also, Johnson will make himself available for General Assembly hearings, the director said.

Administration officials have discussed Johnson’s hiring with finance committee chairmen of both legislative chambers, he said, though not directly with House Speaker Gordon Fox or Senate President Teresa Paiva Weed.